Wednesday, June 27, 2012

Over the past few months, we’ve continued to hear about the
mounting crisis in student loan debt, which has recently surpassed the $1
trillion level and is now reportedly higher than revolving credit card
debt. Moreover, since student loans are
extremely hard to discharge via regular bankruptcy proceedings, there is a fear
that the financial albatross hanging over graduates’ heads – currently
averaging just over $29,000 for 37 million people – is forcing many of today’s
milliennials to indefinitely postpone traditional milestones such as getting
married, having children and buying their own homes.

This issue is definitely a cause for concern, but just what
is the real impact of this issue on home buying demand? According to a recent analysis of government
data by the NAHB, the rise in student loan debt is actually a function of lower
home values: with U.S. household wealth
falling by 40% between 2007 and 2010, students who were formerly able to rely
on their parents’ home equity lines instead took on a patchwork of student
loans from both the federal government and private lenders such as SallieMae (the former GSE fully
privatized in 2004), Citibank or JPMorganChase.

Since the year 2000, student loan debt has reportedly
quadrupled. Not surprisingly, a
challenging job market for recent graduates has meant a rise in 90+ day
delinquency rates for student loans to 8.69% during the first quarter of 2012
(versus 6.67% for home mortgages and 4.55% for auto loans). Even with a 42% jump in student loan
delinquency rates from the third quarter of 2008, the NAHB report concludes that
while the total number of distressed loans is likely to continue rising in the
short run, it certainly doesn’t rise to the hue and cry of ‘a new economic
bubble waiting to burst.’

In fact, the NAHB strongly supports higher education – even
when supported by debt – because college degrees generally confer higher wages,
which in turn is good for housing. If
anything, the trade group concludes that since a full-fledged economic recovery
must include housing, support in the form of the mortgage interest deduction,
affordable down payments, reforming appraisal practices and a federal backstop
for issuing mortgages is essential. In
turn, higher housing values could then re-open the spigot of home equity lines
that helped fund higher education in the past.

Indeed, the tipping point for indebted students may have
already peaked, especially as the Obama Administration has tackled the issue
head-on in an election year (not surprising considering the President enjoys
strong support among younger voters). In
early June, the White House announced changes to the four-year-old Income-Based
Repayment Plan (IBR). Starting in 2014,
the plan for new borrowers will allow them to pay back their federal student
loans at a rate lower than ten percent of their income, versus the current rate
of 15 percent. Loans could be forgiven
after 20 years of steady payments (and as low at 10 years for those choosing a
career in public service) versus the 25-year limit currently in use.

Perhaps more importantly, since just over 2% of eligible
borrowers are registered with the program, a new streamlined application will
go online in September, allowing applicants to automatically transfer over IRS
income data. A year from now, schools
will also be responsible for providing borrowers with information on repayment
plans prior to graduation so they can opt for a plan that is appropriate for
their income.

For those taking out private student loans, however, the
future looks a bit murkier, both because interest rates are usually variable,
and the 2005 Bankruptcy Reform Bill added this category alongside child support
payments and criminal fines to the “cannot discharge in bankruptcy” list. To address the student loan issue,
Congressman Hansen Clarke (D-Mich) recently introduced the Student Loan Forgiveness
Act of 2012, which would cap interest rates at 3.4%, halve the time for
forgiveness from 20 to 10 years (5 years for those in public service) and allow
borrowers with debt levels higher than their annual income to consolidate
existing federal and private loans into a single Direct Loan that would then be
eligible for the plan. In addition, Sen. Al Franken (D-Minn.) also introduced the
True Cost of College Act, which would create a sort of Truth in Lending form
for student loans.

Who knows – maybe with such relief, not only will an entire
generation have more funds to help bolster the economy, but be able to buy
their first home five or ten years sooner than with the existing system in
place.